WASHINGTON -- The Health and Human Services Department has rejected the state of Indiana's request to block Medicaid recipients from receiving care at Planned Parenthood.

Indiana lawmakers passed a bill in May that prevents Medicaid from contracting with any entity that provides abortions, which effectively cut millions of dollars in funding from Planned Parenthood. But Donald Berwick, head of the Centers for Medicare & Medicaid Services (CMS), sent a letter to Indiana's Medicaid office on Wednesday saying that the bill violates federal Medicaid law because it discriminates against Planned Parenthood for reasons other than its ability to provide quality health services.

"We assume this decision is not unexpected," the letter says. "As the Indiana Legislative Services Agency indicated in its April 19, 2011, fiscal impact statement, 'While States are permitted to waive a recipient's freedom of choice of a provider to implement managed care, restricting freedom of choice with respect to providers of family planning services is prohibited.'"

The Hyde Amendment already prohibits federal funding of abortion services, except in cases of rape or incest, but Republican lawmakers insist that Planned Parenthood is using taxpayer dollars for abortions.

"The fundamental issue is that when we take tax dollars and fund any entity that performs abortions, we're forcing taxpayers to support a practice that many feel is objectionable," State Sen. Scott Schneider (R-Indianapolis), the author of the provision to cut Planned Parenthood's funding, told HuffPost in an interview.

It is unclear what the consequences will be if Indiana fails to comply with federal Medicaid law, but an Indiana government official told reporters in April that violating it could cost Indiana all $4 million of the federal funds it receives for family planning.

Planned Parenthood of Indiana -- which, along with the American Civil Liberties Union, has challenged the defunding bill in federal court -- said Berwick's decision "confirm[s] what we've been saying all along."

"This new law is already preventing PPIN Medicaid patients from receiving some services, such as long-term contraceptives, and could ultimately cause 9,300 Medicaid patients to lose their preferred provider of Pap tests, STD testing and treatment, and birth control," said Betty Cockrum, president and CEO of PPIN. "The message from the Centers for Medicare and Medicaid Services is clear, you cannot prevent Medicaid patients from choosing their family planning providers. I trust the State of Indiana will do the right thing, not only for PPIN patients, but for all Medicaid patients in the state and reverse its course."

"Medicaid programs may not exclude qualified health care providers from providing services that are funded under the program because of a provider's scope of practice," Berwick wrote in a letter to Patricia Cassanova, the director of Indiana's office of Medicaid Policy and Planning. "Such a restriction would have a particular effect on beneficiaries' ability to access family planning providers."

Indiana's law bars Planned Parenthood offices in the state from receiving federal money because it provides abortions, among other services.

Indiana should change its plan to conform with federal law, or the state could face penalties, the letter said, noting that Indiana has 60 days to appeal. In the past, state Medicaid plans that did not conform with federal law have been changed by states before HHS enforced any penalties.

In addition to Berwick's letter, HHS also posted a notice on Wednesday to other interested parties that sought to make clear that the department would take a dim view of similar efforts to ban specific providers from federal funds.

Indiana officials should have expected the proposed changes to the state's Medicaid plan would be rejected, Berwick wrote.

"We assume this decision is not unexpected," Berwick wrote. "As the Indiana Legislative Services Agency indicated in its April 19, 2011, fiscal impact statement, `While states are permitted to waive a recipient's freedom of choice of a provider to implement managed care, restricting freedom of choice with respect to providers of family planning services is prohibited.'"

The HHS notice, written by Cindy Mann, the director of the Center for Medicaid, CHIP and Survey & Certification, emphasizes that states may bar providers from participating in Medicaid in certain circumstances, such as if a provider is committing fraud or criminal acts.

"States are not, however, permitted to exclude providers from the program solely on the basis of the range of medical services they provide," Mann wrote.

Medicaid is a federal-state partnership that nationwide now covers more than 60 million low-income children and parents, seniors, including most nursing home residents, and disabled people of any age.

Federal law prohibits using any federal funds, including Medicaid funding, to provide abortions. While Planned Parenthood provides abortion services, it also provides other services such as preventative care, cancer screenings, and family planning and is eligible to receive Medicaid funding for its other services.

Planned Parenthood operates 28 clinics in Indiana, four of which perform abortions. The state chapter has said federal funding makes up about 20 percent of its annual budget.

In recent days, HHS has come under lobbying from both Democrats and Republicans on the issue. Last week, a group of Democratic senators called on HHS Secretary Kathleen Sebelius to inform Indiana that its ban didn't comply with federal law.

In response, eight Republican members of Indiana's congressional delegation sent Sebelius a letter calling on her to support the state's law.